Shulou(Shulou.com)11/24 Report--

In the world's most profitable and hottest consumer goods markets, few companies are preparing to go public with a 99 per cent share.

However, for SoftBank's chip designer ARM, its overwhelming dominance of the smartphone processor market is both the most important asset and the biggest challenge to achieving a valuation of $60 billion in next month's IPO.

In its IPO prospectus released this week, ARM warned investors that its existing large share of the mobile and consumer electronics markets could limit future growth opportunities. While ARM is also expected to enter other markets such as automotive chips and cloud processors, analysts believe that ARM will never gain a near-monopoly similar to that in the smartphone market.

ARM has also failed to make it into the hottest area of the chip market this year: processor chips that support various AI models, such as OpenAI's GPT-4 model. Nvidia is the leader in this field.

"it's hard to see that ARM is going to achieve significant growth in smartphones beyond the current level," said Geoff Blaber, chief executive of CCS Insight, a technology research company. "there is no product more important than the iPhone, so ARM has somehow become a victim of its own success, just like Apple."

The predicament brought by Apple for 30 years, the fates of ARM and Apple have been intertwined. Cambridge-based ARM was founded in 1990 as a joint venture between Apple and Acorn Computers, a British PC maker, and VLSI, a Silicon Valley chipmaker.

ARM has created a new chip architecture with more emphasis on processing speed and design simplicity than just processing power. The company's low-power chips have proved to be the ideal processor choice for battery-powered mobile phones. ARM first emerged in the Nokia era, and the development of iPhone has brought greater growth to the company since 2007.

Although Apple funded the creation of ARM, the relationship between ARM and Apple is now very complicated. Although Apple is one of the most successful mobile phone manufacturers based on ARM chips, Apple's name appears only a few times in ARM's IPO file, and iPhone is mentioned only once.

ARM provides customers with several technology licensing models. In the most comprehensive authorization mode, customers have unlimited access to their entire IP portfolio under ARM's full access Agreement.

Another model is architecture authorization with a smaller scope of authorization, which provides customers with the basic components needed to develop highly customized chips. But in this model, ARM's income is usually not high. Apple holds a long-term license for the ARM architecture and has invested billions of dollars in developing breakthrough processors based on the ARM architecture for iPhone and Mac computers.

"to ARM's surprise, they gave up some preferential deals," said Dylan Patel, chief analyst at consulting firm SemiAnalysis. "

ARM says it can grow by selling more technology to each smartphone. Jay Goldberg, founder of chip consulting firm D2D Consulting, said in a research note on Tuesday that ARM received only a fraction of the value created by the company. In the last fiscal year, customers bought 30 billion chips with ARM processors, while ARM charged a patent fee of 2.7%, or $0.11 per chip.

Patel believes that focusing on working with Apple and a few large manufacturers in the smartphone industry limits ARM's pricing power, although phone makers have no other options to replace ARM's technology.

It is impossible to lose these customers. ARM estimates that 46 per cent of royalty revenue in the last fiscal year came from products released between 1990 and 2012, reflecting the persistence of the company's business model. However, that may not be enough for investors to value ARM at more than $60 billion. Last year, ARM's revenue fell 1% to $2.7 billion.

"they have to open up new markets," said Malcolm Penn, chief executive of chip consultancy Future Horizons. "their situation is different from that in the smartphone market. It's not as easy as it was then, because none of the major end customers can drive the market."

The future beyond smartphones ARM was listed in London and New York before SoftBank acquired ARM in 2016. Son, chief executive of Softbank Corp., declared that Softbank Corp. will push ARM to the core of the Internet of things.

Seven years later, however, analysts pointed out that ARM had failed to achieve the expected new growth. ARM's prospectus shows that the company has a 65% market share in the industrial internet of things and embedded semiconductors, but the value of its products in this area is low, so it is not as profitable as son envisioned.

Son's recent obsession with AI, and ARM has made some progress in this regard. It has teamed up with self-driving companies such as General Motors' Cruise. Nvidia also uses ARM's CPU in its Grace Hopper "super chip" to support the AI model in the data center.

However, in terms of AI, the technology of ARM is not the core of related equipment. AI needs more powerful chips, such as Nvidia's H100, and ARM's technology is more of a supporter.

Still, Patel says there will be a comprehensive transformation of the data center around AI computing, and ARM will be the beneficiary of the transformation. Cloud computing giants Amazon, Google and Microsoft are all developing ARM-based processors for data centers.

ARM estimates that the company currently has a 10 per cent share of the $18 billion cloud processor market, up from 7 per cent in 2020, and expects double-digit growth in the industry over the next few years.

Another key area is the automotive industry. At present, automakers are constantly improving the computing power of vehicles, whether it is engine management or auxiliary driving technology. ARM says it has 41 per cent of the car market and royalty revenues rose 36 per cent last year.

ARM estimates that in the potential market with a total value of $200 billion, that is, "all chips that can contain processors", the company has captured nearly half of its potential. However, after conquering the smartphone market, ARM may find the second $100 billion market more difficult.

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